In SAP, both internal orders and projects are commonly used for control of project expenditure. Both operate as primary cost collectors to monitor projects expenditure to budget. Planned expenditure can be forecast for both internal orders and projects, and the final project costs can be settled to produced fixed assets. For consistency, many organizations choose either internal orders or projects. Internal orders are more simple to set-up, use and report on. If most of your capital expenditure involves direct asset purchases (for example, new forklifts), internal orders are normally sufficient.

Projects provide for more granular cost control and scheduling. If you execute higher-value projects that may involve creation of multiple assets or that span multiple periods (for example, a new manufacturing plant), use of projects is highly recommended. Ideally, your capital expenditure management process should be flexible enough to use both objects: providing simplicity when sufficient, and complexity where required.

Work Breakdown Structure (WBS) elements are used for financial planning and control of projects. WBS elements function as primary cost collectors in a similar way to internal orders but are contained and related within a single project definition. The hierarchical nature of WBS elements facilitates effective activity and cost breakdown. Whilst network activities provide the most granular work allocation and schedule tracking control for project execution, WBS elements provide the primary financial cost control. Budgets can be assigned to higher level nodes of the WBS structure, and thereby enforce cost discipline at the appropriate level. The total project budget is first distributed to the top-level node of the project hierarchy from the investment program. It can then be further distributed to primary WBS elements.

To facilitate work-in-progress valuation and end-of-project asset valuation, the best practices is to align your WBS structure at level 3 with your target fixed assets. For example, the WBS structure for a new site office, may include WBS elements for land, building, and equipment. If lower level WBS elements are required for more granular project management and cost control, they can be defined at level 4, and budget or plans distributed down accordingly. Many organizations have a standardized coding system for their WBS structure relating to primary asset categories at which they wish to track capital work in progress and planned depreciation. This is facilitated in SAP by the default assignment of an investment profile to the elements to automate the asset-under-construction accounting.

WBS hierarchies are normally structured to segregate capital expenditure (CapEx) and operational expenditure (OpEx) at level 2. Large projects will typically incur both types of costs and the budget for each is tracked separately. OpEx costs are settled monthly to responsible cost centers. CapEx costs are capitalized – initially as assets-under-construction, and on project completion are settled to the delivered fixed asset. This difference in accounting treatment is determined by the settlement profile assigned to the WBS element.

Project costs are based on estimates. Most-likely cost estimates will be exceeded approximately 50% of the time. Contingency is normally added to the most-likely estimated cost to ensure that adequate budget is allocated for successful project delivery. It is expected that this contingency provision is only sometimes required. Adding the contingency amount to the project budget up-front may limit the opportunity to control the release of contingency. Within SAP, the best way of handling contingency is to include contingency at the top-level of the project and only distribute best-estimate budget requirements to lower-level WBS elements. In that way, budget availability control can be enforced at procurement at the best-estimate value. If contingency budget is occasionally required to be accessed, a contingency release process can be initiated, appropriately justified, approved, and distributed to the account assignment WBS elements as required.

The best way of managing forecasts in SAP is to use planning versions. Forecasts are typically produced monthly, and controllers value the analysis of forecasting trends to identify unrealistic forecasting behavior. The most common concern is that project managers frequently forecast unrealistic acceleration in the future to compensate for delays in the past. In practice, these delays are seldom recouped, and forecasts tend to be un-realistically optimistic. To facilitate the trend analysis of periodic forecasts, separate planning versions are typically used for each forecasting period. For example, F6 may be the half-yearly capital expenditure forecast. SAP functionally facilitates updating each planning version with actual costs to date, and then capturing anticipated future costs.

Project budgets impose a strict constraint to expenditure enforceable via budget availability control settings. Project budgets may be constrained overall or per fiscal year. Budgets may be distributed down to lower-level WBS elements to control expenditure at a granular level. Changes to project budgets are controlled by differentiating the original budget from supplements and returns. Project plans represent the planned expenditure. Project plans are typically less restrictive than budgets, although as of S/4HANA, planning versions can also be used to enforce availability control. As opposed to project budgets which are annual, project plans can be maintained by month. Planning can be done overall or at individual cost element level. Changes to plan expenditure are handled by using different planning versions.